History of Economic and Monetary Union (EMU)

The plan for EMU was approved as part of the Maastricht Treaty, which was signed in February 1992 and entered into effect on 1 November 1993. The treaty provides for transition into EMU in three stages.

Stage 1

Stage 1 began at the start of July 1990, by which time nearly all barriers to capital flows had been abolished within the EC.

Improvement of economic convergence.  

Stage 2

Stage 2 began at the start of 1994. Cooperation between the Member States in respect of economic and monetary policy was intensified and the necessary preparations were made for the launch of stage 3.

The European Monetary Institute (EMI) was also established at the start of Stage 2.

The European Monetary Institute (EMI) was established in 1994 with two main tasks:

• to strengthen central bank cooperation and monetary policy coordination, and
• to make the preparations needed for establishing the European System of Central Banks (ESCB), for conducting the single monetary policy and for creating a single currency in the third stage of EMU.

In December 1995, the European Council agreed that the European currency unit to be introduced at the start of Stage 3 of EMU would be called the ‘euro', and confirmed that Stage 3 would start on 1 January 1999. The timetable for adoption of the euro was announced well in advance.

The EMI was given the task of carrying out preparatory work on the future monetary policy and exchange rate relationships between the euro area and the other EU countries. In December 1996, the EMI presented its report to the European Council. This formed the basis of the European Council’s June 1997 Resolution on the principles and fundamental elements of the new exchange rate mechanism (ERM II).

The EMI, in December 1996, also presented to the European Council, and shortly afterwards to the public, the selected design series for the euro banknotes that were to be put into circulation on 1 January 2002.

In June 1997, the European Council adopted the Stability and Growth Pact, which aims to ensure budgetary discipline in respect of EMU. The Pact was supplemented and the respective commitments enhanced by a Declaration of the Council of the EU in May 1998. The Pact later underwent reforms in 2005 and 2011.

On 2 May 1998, the Council of the EU, in the composition of heads of state or government, decided that 11 Member States had fulfilled the conditions necessary for participating in Stage 3 of EMU and adopting the single currency on 1 January 1999. The initial participants were Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland. The Council of the EU also reached a political understanding on the persons to be recommended for appointment as members of the Executive Board of the European Central Bank (ECB).

Also in May 1998, the ministers of finance of the Member States adopting the single currency agreed, together with the governors of the national central banks of these Member States, the European Commission and the EMI, that the current ERM bilateral central rates of the currencies of the participating Member States would be used in determining the irrevocable conversion rates for the euro.

On 25 May 1998, the governments of the 11 participating Member States appointed the President, the Vice-President and the four other members of the Executive Board of the ECB. One of those members was the then Governor of the Bank of Finland, Sirkka Hämäläinen. Their appointments took effect on 1 June 1998 and marked the establishment of the ECB. The ECB and the national central banks of the participating Member States constitute the Eurosystem, which formulates the single monetary policy in Stage 3 of EMU.

With the establishment of the ECB on 1 June 1998, the EMI had completed its task. All the preparatory work entrusted to the EMI was concluded in time, and the ECB devoted the rest of 1998 to the final testing of systems and procedures.

STAGE 3

On 1 January 1999, the third stage of EMU commenced with the irrevocable fixing of the exchange rates of the currencies of the participating Member States. The euro area countries adopted the EU’s single currency, the euro.

With the onset of Stage 3, there was a fundamental change in the position of the participating countries' central banks. National monetary policies were replaced by the single monetary policy of the Eurosystem. The national central banks can influence decision-making through the Governing Council of the ECB.

On 1 January 2001, the number of participating Member States increased to 12, when Greece entered the third stage of EMU. Slovenia became the thirteenth member of the euro area on 1 January 2007, followed one year later by Cyprus and Malta. This was followed by Slovakia on 1 January 2009, Estonia on 1 January 2011, Latvia on 1 January 2014, Lithuania on 1 January 2015 and Croatia on 1 January 2023. On the day each country joined the euro area, its central bank automatically became part of the Eurosystem.